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A REPORT ON

SUMMER INTERNSHIP/ PROJECT WORK

For

__________ (J.M.Financial) __________

Submitted to

INDUKAKA IPCOWALA INSTITUTE OF MANAGEMENT (I2IM)

CHAROTAR UNIVERSITY OF SCIENCE AND TECHNOLOGY (CHARUSAT)

CHANGA

Prepared by

(Lokesh Bhatiya)

ID No.:09 mba 02

M.B.A. First Year

Under the Guidance of

Vaishali Shah

Ganshyam Vyash

INDUKAKA IPCOWALA INSTITUTE OF

MANAGEMENT (I2IM)

CHAROTAR UNIVERSITY OF SCIENCE AND TECHNOLOGY (CHARUSAT)

AT. & PO. CHANGA 388 421 TA: PETLAD DIST. ANAND, GUJARAT

JULY 2010

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DECLARATION

I, Lokesh Bhatiya, student of the two-year MBA programme at Indukaka

Ipcowala Institute of Management (I2IM) hereby declare that the report on summer

training and project work entitled Risk and Investment Behaviour of Investor is the result of

my own work. I also acknowledge the other works / publications cited in the report.

Place: Changa ( )

Date: 31.07.2008 (Lokesh Bhatiya)

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Acknowledgement

Sometimes words fall short to show gratitude, the same happened with me during this project. The

immense help and support received from J.M.Financial management Pvt. Ltd. overwhelmed me during the

project.

My sincere gratitude to Mr. Ghanshyam Vyas (Branch head JM Financial Pvt. Ltd., Baroda) whose

co-operation and guidance proved immensely helpful to me during the course of summer training.

I am also very thankful to Mr. Jignesh Mochi, Mr. Muliksir for their guidance & support during the

summer training & summer project.

I am very grateful to the G. Krishnamurthi (Principal) for allowing us to take my training from such a

reputed organisation. I am thankful to Mrs. Vaishali Shah for helping me in every related aspect of training

& project. I also very thankful to Mr. Govind Dave for providing their valuable reference in arranging the

summer training in such a reputed organization.

I also wish to acknowledge my sincere thanks to the entire concern faculty for their valuable advice

and suggestions.

Last but not the least; my heartfelt love for my parents, whose constant support and blessings helped

me throughout this project.

LOKESH BHATIYA

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TABLE OF CONTENTS

5

Sr.No. Particular Page Number

PART 1 ORGANISATIONAL PROFILE

1 Introduction 7

2 The company 9

a. History 9

b. Mission & Vision 12

c.

Management structure 14

d. Products 18

3 Functional area 19

a. Market & Marketing 19

b. Production/Operation 22

c. Human Resourses 24

4 Decision making 27

a. Strategic decision area &

Decision making process

27

b. Tactical and Operational

decision area & Decision making

process

28

c. Formal & Informal power

relations

29

5 Financial Analysis 30

a. Profitability of the firm of last

4 years

30

b. Asset built up in the last 4

years

33

c. Key financial ratio &

interpretation

36

d. Financial health & future of

the organization

37

6. My learning from the study of organization 38


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EXECUTIVE SUMMARY OF ORGANIZATION PROFILE

The report contains the information about J.M .Financial and the core areas as well as the services that it

provides. It provides information about

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PART 2-Project Study

7. Overview of the Project 40

a. Background of the study 41

Objective of Study 41

8. Research Methodology 42

9. Data analysis, Finding & Interpretation

10. Limitation

11. Appendices

13 References


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Individuals financial advisors

Equity brokerage group

Fixed deposits

It also contains different functional areas such as

Marketing management

Financial management

Human resources management

The report contain various tactical decisions, strategic, operational financials analysis

INTRODUTION

JM Financial group

JM Financial is an integrated financial services group offering wide range of capital market service to

its corporate and individual clients. The Group has business interest in investment banking, institutional

equity sale & broking, private & corporate wealth management, research, equity broking, portfolio

management, asset management, commodity broking etc.

JM Financial service private limited

JM Financial service private limited is a private sector organization. The Register & Corporate office

of this organization is in Mumbai and the branch office of JM Financial is in 22 cities in India.

JM Financial private limited (JM Financial Services) is a full service wealth management and equity

broking firm with a focus on capital markets.

JM Financial services offers research-based instrument advisory and equity trading services to high

net worth individuals and corporate investors across wide range of financial product.

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Their domestic research capabilities, capital market expertise and an exclusive level of personal

attention enable them to design and execute customized investment strategies for their clients.

JM Financial service private limited provide full time service in

Private Wealth Group advising high net worth individuals

Corporate wealth Group advising top approximately 500 Corporate Treasuries

Secondary Broking- Equity and derivatives

Depository services

Portfolio Management Service

Distribution of

Mutual Funds deft and equity

Equity IPOs

Fixed income product

Real estate funds

Private equity

Structured Product

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THE COMPANY

Evolution & History

JM Financial Limited was started in 1986 by JM Financial & Investment Consultancy Services

Private Limited ( JM FICS) to engage in the business of stock broking and securities.

JM Financial & JM FICS sponsored one of Indias first private sector mutual fund viz. JM mutual

funds, JM financial mutual fund made a simultaneous launch of three open ended funds in December, 1994.

The trustee of this fund is JM Financial Asset Management Pvt. Ltd.

JM Financial Group subsequently entered into in equity partnership with Morgan Stanley in 1999.

Morgan Staley is one of the worlds leading financial service firms with approximately 45,000

employees in 390 offices across 23 countries worldwide. Morgan Stanley has a presence is almost every

financial market.

The partnership led to setting up of two joint venture companies, JM Morgan Stanley Private

Limited, with interest in the area of investment banking, retail distribution, private wealth management and

fixed income securities and JM Morgan Stanley Securities Private Limited with operations in institutional

equity sales and trading. While JM Financial holds 51% of JM Morgan Stanley private limited with 49%

being held by Morgan Stanley. JM Morgan Stanley private limited operates in the area of retail distribution

and fixed income sales & trading through two wholly owned subsidiaries viz., JM Morgan Stanley Financial

Service Private Limited and JM Morgan Stanley Fixed Income Securities Private Limited.

JM Financial Limited has approved the merger of JM Securities Private Limited, a JM Financial

group of company itself. This merger is subject to satisfactory receipts of all statutory, regulatory, corporate

and other approvals as may be required, including but not limited to, approval of relevant high citst, Reserve

Bank of India, Stock Exchange, Securities Exchange Board of India, and share holders. After the proposed

merger JM Financial had expend its interest in equity broking, investment banking, retail & fixed income

broking, asset management, commodities broking and equity financing business.

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Finance Asia

domestic share sale

Best India Deal - Reliance Industries USD

4.8 billion restructuring

2004 Finance Asia

Asset Asian Awards

Asia Money

Asia Money

Asia Money

Best India Deal - USD 1.2 billion Tata

Consultancy Services IPO

Best Privatisation - USD 2.4 billion ONGC

follow-on offering

Best Deal in India - OIL & Natural Gas

Corporation

Best Overall Strategy Brokers

Best Overall Macroeconomics Brokers

2002 CIRISL Best Fund Awards Best Performing Open-end Debt Scheme -

JM Income Fund

2001 CIRISL Best Fund Awards Best Performing Open-end Debt Scheme -

JM Income Fund

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Vision Statement

To be the most trusted partner for every stakeholder in the financial world.

Mission Statement

Earning trust is a process (it can be gained and lost every day!)

Sharing trust creates great teams (whether betJMen employees or betJMen organisations)

Being trustworthy is the most efficient way of generating and retaining long-term business

Selftrust is the starting point of trusting others

JM believe:

Earning trust is a process (it can be gained and lost every day!)

Sharing trust creates great teams (whether between employees or between organisations)

Being trustworthy is the most efficient way of generating and retaining long-term business

Selftrust is the starting point of trusting others

Believes

JM FINANCIAL have always sought to be a value-driven organization, where its values direct its

growth and success.

Integrity:

Integrity is fundamental to its business. JM FINANCIAL adhere to moral and ethical principles in

everything JM FINANCIAL do as professionals, colleagues and corporate citizens. Its reputation based on

its high standards of integrity is invaluable.

Teamwork:

JM FINANCIAL believe extensive teamwork is what makes it possible for us to work together

towards a common goal. JM FINANCIAL value and respect each individual's commitment to group effort.

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Client Focus:

JM FINANCIAL always put the interest of its clients before its own. JM FINANCIAL understand its

client needs, seek new opportunities for them, address them and deliver unique solutions as per their

expectations. The success of its clients is the biggest reward for us.

Innovation:

JM FINANCIAL understand its clients' needs and develop solutions for the most complex or the

simplest, the biggest or the smallest financial transactions, whether for individuals or institutions. Creativity

and innovation are key factors to everything JM FINANCIAL do. JM FINANCIAL encitsage new ideas

which help us address unique opportunities.

Implementation:

Its expertise, experience and its continuous focus on the quality of execution ensures effective

implementation of its strategies.

Performance:

JM FINANCIAL believe in development of its people and continuously hone its skills, setting

higher targets of performance for itsselves. JM FINANCIAL strive to attract, develop and retain the best

talent. JM FINANCIAL recognize and reward talent based on merit.

Partnership:

Its relationships with all its stakeholders reflect its spirit of partnership. Clients see us as trusted

advisors, shareholders see us as partners and employees see us as family. JM FINANCIAL respect, trust and

support all its stakeholders.

Management Structure of J M Group

JM FINANCIAL is a private company and the offices are spread over the country. J M

FINANCIAL has many branches in India. its structure is discuss as follow with the management hierarchy.

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Management Structure of J M Group

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Geographical Spread of JM Financial Services Pvt. Ltd.

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Products

Primary Market:

IPO Offering - Debt and Equity

Mutual Fund - Debt and Equity

Secondary Market:

Equity Advisory and Broking

Fixed Income Advisory & Execution

Future & Option Advisory & Broking

Buybacks

Block Trade

Sales Services

Customized investment advisory and asset allocation of portfolio

Portfolio Tracking for Mutual Funds

Portfolio Tracking for Secondary Equity

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FUNCTIONAL AREAS

Business segment of JM Financial service

Private wealth Group

Private Wealth Group (PWG) is a personalized investment advisory service for high net worth

individual with an investible surplus in excess of USD 1 mn. (Rs 5 crore) with dedicated wealth

managers for managing the clients wealth.

PWG segment draws upon the full spectrum of firm resources & expertise in capital markets for

generating investment ideas and developing customized investment solution for meeting their clients

financial goal.

Corporate wealth group

Corporate Wealth Group (CWG) at JM Financial provides research-based investment advisory

service to top 500 corporate treasuries for deployment of surplus funds. A dedicated investment advisor

supported by research and product team is assigned to each corporate client.

Equity Brokerage Group

Equity Brokerage group (EBG) offers trading and research-based equity advisory services to high net

worth individuals, retail clients and corporates.

This group focuses on generating wealth for the client through stoke ideas and trading strategies

based on a combination of fundamental and research analysis.

Equity Brokerage Group distinguishes itself from others by focusing on providing customized

investment solutions and brokerage services to various client segments.

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Target market

Target market of JM Financial is all those who wants to invest either in fixed deposit or wands to invest

in share market. JM financial also help the person who wants to take expert advice. So the JM financial

target market is as follow

Broker

Sub-broker

Local agent

Individual investor

Senior citizen

Conservative investor

Aggressive investor

Market share of JMFS

Approximately JMFS captures 20% of total market share of overall broking but the brighter part is

that its market share is increasing year by year.

Competitors of JMFS

Reliance Capital

Kotak

Karvy

Shri Global traders

Bajaj Holding

Local broker

VSE

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Distribution channel

JMFS wants to reach deep in the market. It has very good link with sub broker. So by sub broker

chain company try to reach it`s target market.

Promotional measure

Company use all possible source of promotional measure to reach its target market. The promotional

measure includes

Advertisement

Sale promotion

Publicity

Development of franchise

Development of sub broker

Measure of customer satisfaction taken by the company

JMFS uses very simple technique to know customer satisfaction. Company use

Feedback from filling

Direct contact with customer

Provide some addition service

Help in tax panning etc.

Try to advice the customer the satisfy customer financial need

Office timing

Monday to Friday 9.00 AM to 6.30 PM

Saturday 10.30 AM to 2.30

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Attendance system

Attendance system in J M financial is very simple. All employees have to sign in the register when

they come & when they go out. In this way they record in time & out time of any employ.

Critical working hour

Critical working hour in the organization is the trading time in the stock market i.e. 9:00 AM to 3:30

PM.

Discipline

JM Financial is very particular about in & out time of employees. So all the employees have to

follow strict time schedule of the organization.

Human resource planning

Whenever there is requirement of manpower each & every branch send there need to Head office.

The branch also describes the job where the person is required. The brief job description is also given by the

branch office. Base on the

Requirement of the branch the head office takes the responsibility overall human resource planning.

The HRP of the JM financial includes number of person require, type of person required, number of person

require in each & every branch, source of recruitment whether it is eternal or external source & so on.

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Process of HRP

Recruitment & Selection

After HRP recruitment and selection process starts. Head office provides power to the branch head

for recruitment & selection at junior level. Branch head specify the requirement like skill, education,

experience etc. After that though interview recruitment & selection process done.

At senior management level recruitment & selection is Completed through head office. JM Financialgenerally use advertisement etc. to generate the application.

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Each branch send their requirement to Head office

Head office collects the data of requirement of each

branchHead office check whether the person actually required

After that Head office do actual HRP for each branch


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After screening the application, some written test & interview is use for final selection.

Level Source of

recruitment

Selection

method

Selection at

Junior management

Level

Internal source mainly

though reference

Interview Branch level

Senior management

Level

External source mainly

though advertisement

Interview Head office

level

Training & Development

Whenever a new employ is recruited training is provided to the new employ. The number of days of

training is depends on which types of work the person is going to do. But it is on an average 15 days to 20

days training is provided to a new employ.

Promotion policy

Promotion is provided on JM Financial strictly on the merit based. Performance appraisal plays the

key role in the promotion. The employ who has highly rated in his performance appraisal has better chance

of getting promotion.

Transfer policy

Organization reserves the transfer whenever need arise. Organization can transfer any employ at

different branch in same city or different city.

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Welfare facility of the organization

Picnic once in a year

Performance bonus

Tea 3-4 times in a day

Competition among employ child & some prize distribution

Budgetary control system

Budgetary system is control head office in Bombay. all the major decision regarding the budget are

taken at H.O , but execution is done at different branches .

Board meeting

The board meeting is held quarterly at head office. they make all the kind of decisions including the

regular work and also the researches they make .

Senior management decision

The senior management makes all the tactical decisions regarding all the major investment in the

different branches.

Operating decision

These decisions are made by the head of the branches the operating decisions includes all the day to

day working decisions

There is nice and smooth coordination among all the layers in the organization the work is allocated

as per the qualification as well as the specialization.

Distribution Channel

JMFS wants to reach deep in the market. It has very good link with sub broker. So by sub broker

chain company try to reach it`s target market.

DECISION MAKING

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Strategic Decision Area at JM Financial

JM Financial use a systematic method to identity strategic decision area. The strategic decision area

is mainly concern with long term goals and objective of a firm. External environment is a great impact on

organizational strategic decision area.

The main strategic decisions areas in JM Financial are are:

Whether to open new branch or not

Where to open new branch

Where to close down the branch

Policy to deal with competition in long run

Decide the wage & salary structure to retain employ

Recruitment & selection decision

Overall firm plan to survival in the long run

Strategic Decision making process of firm

Key feature strategic decision making in JM Financial

Centralized decision making

Fully control by head office Mumbai

Key role top management

Decision for long run goal of a farm

Process of Strategic Decision making

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1. Analysis of internal & external environment

2. Analysis of strength & weakness of firm

3. Find the list of need

4. Provide the priority of need

5. Make the final strategic decision

6. Get approval & implementation

Tactical & operational decisions in JM Financial

The main tactical & operational areas are

Day to day decision of firm

Decision to deal with short term competition

Decision of recruitment & selection at junior level

Key feature of operational decision at JM Financial

Centralized decision

Decision at head office Mumbai

Implemented by the branch head at respective branch

Process of operational & tactical decision

1. Branch head find the requirement of its own branch

2. It send its requirement at head office

3. It also send his idea view etc. what has to done to solve the problem

4. Branch head analysis all the requirement5. Final decision taken by branch head

6. Implementation is done on respective branches

Formal power relation

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JM Financial follow hierarchy for decision making. At branch level power is in the hand of branch

head. He is responsible for at branch activity. All other employee at branch level has power to do their own

work but branch head give final approval.

But the strategic decision or operational decision all the power goes to top management. Top

management has a power to take long term and short term decision of a firm. Branch manager has very little

power in this regard.

Informal power relation

All though branch head has very little power in decision making but top management always

welcome his suggestion.

At branch level also branch head provide freedom to the employees for giving suggestion in branch

level decision making and suggestion play an important role in decision making.

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Profit Before Tax 9.46 15.73 35.72 1,751.81 13.15

Extra-ordinary items 0.00 -0.01 0.00 0.01 -0.02

PBT (Post Extra-ord Items) 9.46 15.72 35.72 1,751.82 13.13

Tax -0.01 0.45 0.42 391.63 5.17

Reported Net Profit 9.48 15.27 35.31 1,360.16 7.97

Total Value Addition 0.24 1.87 3.62 18.46 9.26

Preference Dividend 0.00 0.00 0.00 0.00 0.00

Equity Dividend 2.83 7.50 15.00 75.00 15.00

Corporate Dividend Tax 0.40 1.05 2.55 12.75 0.05

Per share data (annualised)

Shares in issue (lakhs) 113.25 155.25 300.00 300.00 7,497.83

Earning Per Share (Rs) 8.37 9.83 11.77 453.39 0.11

Equity Dividend (%) 25.00 25.00 50.00 250.00 20.00

Book Value (Rs) 28.34 140.87 127.00 551.15 21.96

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Net profit of last 4 years

Year Net Profit (Rs in Lakhs)

2005-06 15691569

2006-07 35313531

2007-08 136017136017

2008-09 797

By the graph we see that profit of JM Financial is consistently increased over the years. But the year

2008 profit has increase at very high rate. The main reason of this rise is the market boom at that time and in

this profit other income contributes the most. So, immediate decline in the profit of the next year is not a

cause of worry. After all in the time of recession the firm has performed well.

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Net Fixed asset in last 4 year

JM Financial

Balance Sheet ------------------- in Rs. Cr. -------------------

Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

12 mths 12 mths 12 mths 12 mths 12 mths

Sources Of Funds

Total Share Capital 11.29 15.50 29.98 29.98 74.97

Equity Share Capital 11.29 15.50 29.98 29.98 74.97

Share Application Money 0.00 12.37 0.00 0.00 0.00

Preference Share Capital 0.00 0.00 0.00 0.00 0.00

Reserves 20.81 203.19 351.02 1,623.46 1,571.40

Revaluation Reserves 0.00 0.00 0.00 0.00 0.00

Networth 32.10 231.06 381.00 1,653.44 1,646.37

Secured Loans 0.00 0.00 0.00 0.00 0.00

Unsecured Loans 0.00 0.00 0.00 0.15 0.28

Total Debt 0.00 0.00 0.00 0.15 0.28

Total Liabilities 32.10 231.06 381.00 1,653.59 1,646.65

Mar '05 Mar '06 Mar '07 Mar '08 Mar '09

12 mths 12 mths 12 mths 12 mths 12 mthsApplication Of Funds

Gross Block 1.09 1.09 1.18 1.90 2.34

Less: Accum. Depreciation 0.23 0.24 0.27 0.37 0.62

Net Block 0.86 0.85 0.91 1.53 1.72

Capital Work in Progress 0.00 0.00 0.00 0.04 0.00

Investments 31.13 148.16 350.65 1,521.43 1,524.08

Inventories 0.00 0.00 0.00 0.00 0.00

Sundry Debtors 0.00 0.00 0.00 0.00 0.00

Cash and Bank Balance 0.18 0.67 0.82 0.48 0.85

Total Current Assets 0.18 0.67 0.82 0.48 0.85

Loans and Advances 4.89 92.71 48.81 101.65 103.75

Fixed Deposits 0.00 0.00 0.00 238.65 150.68

Total CA, Loans & Advances 5.07 93.38 49.63 340.78 255.28

Deffered Credit 0.00 0.00 0.00 0.00 0.00

Current Liabilities 1.74 2.77 2.65 122.37 118.96

Provisions 3.23 8.55 17.55 87.81 15.46

Total CL & Provisions 4.97 11.32 20.20 210.18 134.42

Net Current Assets 0.10 82.06 29.43 130.60 120.86

Miscellaneous Expenses 0.00 0.00 0.00 0.00 0.00

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Total Assets 32.09 231.07 380.99 1,653.60 1,646.66

Contingent Liabilities 3.59 3.59 3.58 3.80 4.27

Book Value (Rs) 28.34 140.87 127.00 551.15 21.96

Net Fixed asset in last 4 year

Year 2005-

06

2006-

07

2007-

08

2008-

09

Fixed Assets

(Rs in lakhs)

85.99 84.21 90.84 153.1

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From the graph we see that JM Financial`s fixed asset has increased over the years. By the end of

2008-09 the fixed asset of JM financial 172.67 lakhs which is increased by 105.05% as compare to the year

of 2005-06. So it shows that organization is doing well and organization has enough funds to in invest in

fixed assets.

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Key Ratio

1. Current Ratio

Year Current Ratio

Mar '06 8.24

Mar '07 2.46

Mar '08 1.62

Mar '09 1.90

From the data given above one can conclude that the firm is depending more and more on debt fund for

financing the business which good for the firm but the investor should take care of it.

2. Dividend per Share

Years Dividend per

share

Mar '06 02.50

Mar '07 05.00

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Mar '08 25.00

Mar '09 00.20

From the above graph we can one can say that dividend per share is increasing. From the year 2006 to 2008

dividend per share has increased by 900%. But in 2009 it declined. The reason is Stock split . The Share of JM has

splited into 10 and now it of Rs.1 F.V. which was previously of Rs 10 each.

3. Gross Profit Ratio

Year G.P. Ratio (in %)

March 2008 44.82

March 2009 61.04

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The profit margin of the firm is considerably increased as compare to past year. The profit margin has

increased even after the year was of recession which is good sign factor.

Financial health of the organization

Financial health of the organization is very good the reasons are

The organization has performed well even in recession period.

The ratio of the organization is also very good

Organization has not any major loan liability it is also a good sign.

Organization EPS is also very good.

Future of the organization

JM Financial is growth oriented organization the future of JM Financial is looking bright. It happen that JM Financial

may not earn super normal profit like 2008 but in the long run the future of the organization is very good.

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MY LEANINGS FROM THE STUDY

The objective of the summer training at the M.B.A level is to develop the idea about the industrial

environment as well as business practices in order to develop the a practical skills as a supplement to

theoretical study of management in general . After this training I realize how the real world works

Now I am in better position to understand the hierarchy how the different department are loaded with

responsibilities and accountability. How the top management control the activities and the work of bottom

level.

The study of organizational behaviour has help me to realize how an individuals behave in work

stress what are relationship between the different employees particularly at the operation level

The analysis and interpretation of cost has made me realize how important the costing is for any

organization weather production or a service particularly at the J.M.F.S the cost cutting is high due to the

recession.

Marketing is done through their strong contacts with their clients and sub brokers whenever a new

N.F.O or an I.P.O is comes they contact their customers and inform them. The individual financial advisory

groups stay in contacts with customers and try build new through the existing ones.

Finance is the life blood of any organization here at the J.M.F.S I realize how finance is related with

all the other departments all the functions in the organization have to come across finance first . the working

pattern of J.M.F.S depends heavily on the performance of the stock market this thing roves from the profit

which J.M has reached ,when the stock market was 21000 mark in 2008

I also learned many new things as well from J.M such as how trading is done how investors react in

bull and bear period.

I also got the idea about mutual fund & How it works

Mutual Fund Operation Flow Chart

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Meaning

A Mutual Fund invests the pool of money collected from the investors in a range of securities comprising

equities, debt, money market instruments etc.

The main advantages of the mutual funds are

Capital appreciation

Dividend distribution

Diversified risk

Diversified porthfolio

we came to know various terms like of share market

Stock futures

Stoke option

Difference between share, mutual fund and fixed deposits

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promote the Asset Management Company also, in which it holds a majority stake. In many cases a sponsor

can hold a 100% stake in the Asset Management Company (AMC). E.g. Birla Global Finance is the sponsor

of the Birla Sun Life Asset Management Company Ltd., which has floated different mutual funds schemes

and also acts as an asset manager for the funds collected under the schemes.

Characteristics:

A mutual fund actually belongs to the investors who have pooled their funds.

A mutual fund is managed by investment professionals and other service providers, who earn a fee for their

services, from the fund.

The pool of funds is invested in a portfolio of marketable investments. The value of the portfolio is updated

every day.

The investors share in the fund is denominated by units. The value of the units changes with change in

the portfolios value, every day. The value of one unit of investment is called the Net Asset Value or NAV.

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2. HISTORY OF THE INDIAN MUTUAL FUND INDUSTRY:

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the

initiative of the Government of India and Reserve Bank of India. In the past decade, Indian mutual fund

industry had seen dramatic improvements, both quality wise as well as quantity wise. Before, the monopoly

of the market had seen an ending phase; the Assets under Management (AUM) were Rs. 67bn. The private

sector entry to the fund family raised the AUM to Rs. 470 bn in March 1993 and till April 2004; it reached

the height of 1,540 bn.

Putting the AUM of the Indian Mutual Funds Industry into comparison, the total of it is less than the

deposits of SBI alone, constitute less than 11% of the total deposits held by the Indian banking industry.

The main reason of its poor growth is that the mutual fund industry in India is new in the country.

Large sections of Indian investors are yet to be intellectualed with the concept. Hence, it is the prime

responsibility of all mutual fund companies, to market the product correctly abreast of selling.

The mutual fund industry can be broadly put into four phases according to the development of the

sector. Each phase is briefly described as under.

First Phase 1964-87 Unit Trust of India (UTI) was established on 1963 by an Act of Parliament.

It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control

of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank

of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme

launched by UTI was Unit Scheme 1964. At the end of 1988 UTI had Rs.6,700 crores of assets under

management.

Second Phase 1987-1993 (Entry of Public Sector Funds) 1987 marked the entry of non- UTI,

public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and

General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund

established in June 1987 followed by Canbank Mutual Fund (Dec 87), PuJ.M.Financial servicesab National

Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda

Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in

December 1990. At the end of 1993, the mutual fund industry had assets under management of Rs.47,004

crores.

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Third Phase 1993-2003 (Entry of Private Sector Funds) With the entry of private sector funds in

1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund

families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which

all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now

merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993. The

industry now functions under the SEBI (Mutual Fund) Regulations 1996. The number of mutual fund

houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry

has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds

with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under

management was way ahead of other mutual funds.

Fourth Phase since February 2003 In February 2003, following the repeal of the Unit Trust of

India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit

Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representingbroadly, the assets of US 64 scheme, assured return and certain other schemes. It is registered with SEBI and

functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March

2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund,

conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different

private sector funds, the mutual fund industry has entered its current phase of consolidation and growth.

GROWTH IN ASSETS UNDER MANAGEMENT

Note: Erstwhile UTI was bifurcated into UTI Mutual Fund and the Specified Undertaking of the Unit

Trust of India effective from February 2003. The Assets under management of the Specified Undertaking of

the Unit Trust of India has therefore been excluded from the total assets of the industry as a whole from

February 2003 onwards.

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3. MUTUAL FUND STRUCTURE:

The Structure Consists

The structure of mutual funds in India is governed by the SEBI Regulations, 1996. These regulations

make it mandatory for mutual funds to have a 3-tier structure of Sponsors-Trustee-AMC (Asset Management

Company). The Trustees are responsible to the investors in the mutual funds, and appoint the AMC for

managing the investment portfolio. The AMC is the business face of the mutual funds, as it manages all the

affairs of mutual funds. The mutual funds and AMC have to be registered by the SEBI.

Sponsor

Sponsor is the person who acting alone or in combination with another body corporate establishes amutual fund. Sponsor must contribute at least 40% of the net worth of the Investment Managed and meet the

eligibility criteria prescribed under the Securities and Exchange Board of India (Mutual Funds) Regulations,

1996.The Sponsor is not responsible or liable for any loss or shortfall resulting from the operation of the

Schemes beyond the initial contribution made by it towards setting up of the Mutual Fund

Trust

The Mutual Fund is constituted as a trust in accordance with the provisions of the Indian Trusts Act, 1882 by

the Sponsor. The trust deed is registered under the Indian Registration Act, 1908.

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Trustee

Trustee is usually a company (corporate body) or a Board of Trustees (body of individuals). The

main responsibility of the Trustee is to safeguard the interest of the unit holders and inter-alia ensure that the

AMC functions in the interest of investors and in accordance with the Securities and Exchange Board of

India (Mutual Funds) Regulations, 1996, the provisions of the Trust Deed and the Offer Documents of the

respective Schemes. At least 2/3rd directors of the Trustee are independent directors who are not associated

with the Sponsor in any manner.

Asset Management Company (AMC)

The AMC is appointed by the Trustee as the Investment Manager of the Mutual Fund. The AMC is

required to be approved by the Securities and Exchange Board of India (SEBI) to act as an asset

management company of the Mutual Fund. At least 50% of the directors of the AMC are independent

directors who are not associated with the Sponsor in any manner. The AMC must have a net worth of at least10 crores at all times.

Registrar and Transfer Agent

The AMC if so authorized by the Trust Deed appoints the Registrar and Transfer Agent to the Mutual

Fund. The Registrar processes the application form, redemption requests and dispatches account statements

to the unit holders.

Custodian

A custodian handles the investment back office of a mutual fund. Its responsibilities include receipt and

delivery of securities, collection of income, distribution of dividends, and segregation of assets between

schemes. The sponsor of a mutual fund cannot act as a custodian to the fund. For example, Deutsche Bank is

a custodian, but it cannot service Deutsche Mutual Fund, its mutual fund arm.

Depository

Indian capital markets are moving away from having physical certificates for securities, to ownership of

these securities in dematerialized form with a Depository.

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4. MUTUAL FUND OPERATION:

HOWDOESA MUTUAL FUNDWORK?

Mutual Fund Operation Flow Chart

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5. TYPES OF MUTUAL FUND:

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A Mutual Fund may float several schemes, which may be classified on the basis of its structure, its

investment objectives and other objectives.

Type of Mutual Fund on the bases of constitution:

Open Ended Schemes

As the name implies the size of the scheme (fund) is open i.e. not specified or pre-determined.

Entry to the fund is always open, the investor who can subscribe at anytime. Such fund stands ready to buy

or sell its securities at anytime. The key feature of Open-ended schemes is Liquidity. It implies that the

capitalization of the fund is constantly changing as investors sell or buy their shares. Further, the shares or

units are normally not traded on the stock exchange but are repurchased by the funds at announced rates.

Open-ended schemes have comparatively better liquidity despite the fact that these are not listed. The reason

is that investors can any time approach mutual fund for sale of such units. No intermediaries are required.

Moreover, the realizable amount is certain since repurchase is at a price based on declared net asset value

(NAV). The portfolio mix of such schemes has to be investments, which are actively traded in the market.

Otherwise it will not be possible to calculate NAV. This is the reason that generally open-ended schemes are

equity based. In Open-ended schemes, the option of dividend reinvestment is available.

Close-Ended Schemes

A Close ended schemes have a definite period after which their shares/units are redeemed. The

scheme is open for subscription only during a specified period at the time of launch of a scheme. Investors

can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of

the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the

investors, some close-ended funds give an option of selling back the units to the mutual fund through

periodic repurchase at NAV related prices. In these types of schemes, the size of the fund kept to be

constant. SEBI regulations stipulate that at least one of the two exit routes is provided to the investor i.e.

either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAVgenerally on weekly basis.

Interval schemes

Interval Schemes combine the features of both open-ended and close-ended schemes. They are open

for sale or redemption during pre-determined intervals at NAV based prices.

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Mutual Fund schemes by Investment Objectives:

EQUITY FUNDS

These funds invest a major part of their corpus in equities. The composition of the fund may vary from

scheme to scheme and the fund managers outlook on various scrips. The Equity Funds are sub-classified

depending upon their investment objective, as follows:

1. Growth Fund:

Aim to provide capital appreciations over the medium to long term. These schemes normally invest a

majority of their funds in equities and are willing to bear short term decline in value for possible future

appreciation. These schemes are not for investors seeking regular income or needing their money back in the

short-term

2. Diversified Equity Fund:

Diversified equity funds are the most popular among investors. They invest in many stocks across many

sectors, and because they have the freedom to chop and churn their portfolios as they like, diversified equity

funds are a good proxy to the stock market. If a general exposure to equities is what you want, they are a

good option. They can invest in all listed stocks, and even in unlisted stocks.

3. Equity Linked Savings Schemes (ELSS):

Equity linked savings schemes (ELSS) are diversified equity funds that additionally offer income tax

benefits to individuals. ELSS is one of the many section 80c instruments, along with the more popular debt

options like the PPF, NSC and infrastructure bonds. In this Section 80c grouping. ELSS is unique.

4. Index Fund:

An index fund is a diversified equity fund; with a difference- a fund manager has absolutely no say in

stock selection. At all times, the portfolio of an index fund mirrors an index, both in its choice of stocks and

their percentage holding. As of March 2004, equity index funds tracked either the Sensex or the Nifty. So, an

index fund that mirrors the Sensex will invest only in the 30 Sensex stocks, which too in the same proportion

as their weight age in the index.

5. Sector Fund:

Sector funds invest in stocks from only one sector, or a handful of sectors. The objective is to capitalize

on the story in the sectors, and offer investors a window to profit from such opportunities. Its a very narrow

focus, because of which sector funds are considered the riskiest among all equity funds.

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6. Mid Cap Fund:

These are diversified funds that target companies on the fast growth trajectory. In the long run, share

prices are driven by growth in a companys turnover and profits. Market players refer to them as mid-sized

companies and mid-cap stocks with size in this context being benchmarked to a companys market value.

So, while a typical large cap stock would have a market capitalization of over Rs 1,000 crores, a mid-cap

stock would have a market value of Rs 250-2,000 crores.

DEBT FUNDS

These Funds invest a major portion of their corpus in debt papers. Government authorities, private

companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debtinstruments, these funds ensure low risk and provide stable income to the investors.

Debt funds are further classified as:

1. Gilt Funds:

Invest their corpus in securities issued by Government, popularly known as GOI debt papers. These

Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they

invest in papers backed by Government.

2. Income Funds:

Income funds aim to maximize debt returns for the medium to longer term. Invest a major portion into

various debt instruments such as bonds, corporate debentures and Government securities.

3. MIPs:

Invests around 80% of their total corpus in debt instruments while the rest of the portion is invested in

equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return

matrix when compared with other debt schemes.

4. Short Term Plans (STPs):

Meant for investors with an investment horizon of 3-6 months. These funds primarily invest in short term

papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also

invested in corporate debentures.

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5. Liquid Funds:

Also known as Money Market Schemes, These funds are meant to provide easy liquidity and

preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call

money market etc. These funds are meant for short-term cash management of corporate houses and are

meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are

considered to be the safest amongst all categories of mutual funds.

6. Floating Rate Funds:

These income funds are more insulated from interest rate than their conventional peers. In other words,

interest rate changes, which cause the NAV of a conventional debt fund to go up or down, have little, or no,

impact on NAVs of floating rate funds.

BALANCED FUNDS

These funds, as the name suggests, are a mix of both equity and debt funds. They invest in both

equities and fixed income securities, which are in line with pre-defined investment objective of the scheme.

These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and

the debt part provides stability in returns.Each category of funds is backed by an investment philosophy,which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the

funds objective and invest accordingly.

HYBRID FUNDS

Growth and Income Fund:

Strike a balance capital appreciation and income for the investors. In these funds portfolio is a mix

between companies with good dividend paying record and those with potential capital appreciation. These

funds are less risky than growth funds bit more than income funds.

Asset Allocation Fund:

These funds follow variable asset allocation policy. These move in an out of an asset class (equity, debt,

money market or even non-financial assets). Asset allocation funds are those, which follow more stable

allocation policies like balanced funds. Those, which flexible allocation policies, are like aggressive

speculative funds.

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6. COMPARISON OF MUTUAL FUND:

7. ADVANTAGES OF MUTUAL FUND:50

Mutual

FundObjective

RiskInvestment

Portfolio

Who Should

Invest

Investment

Horizon

Equity

Funds

Long-term Capital

AppreciationHigh Risk Stocks & Shares

Aggressive investors

Long term Inv.

3

years +

Balanced

Funds

Growth & Regular

Income

Capital

Market Risk

and Interest

Risk

Balanced ratio of equity

and debt funds to ensure

higher returns at lower

risk

Moderate &

Aggressive

2

years +

Index

Funds

To generate returns

that are

commensurate with

returns of respective

indices

NAV varies

with index

performance

Portfolio ndices like

BSE, NIFTY etcAggressive investors.

3

years +

Gilt Funds Security & IncomeInterest Rate

RiskGovernment securities

Salaried &

conservative investors

12

months +

Bond

FundsRegular Income

Credit Risk &

Interest Rate

Risk

Debentures,

Govt securities,

Corporate Bonds

Salaried &

conservative investors

12

months +

Money

Market

Liquidity +

Moderate Income +

Reservation of

Capital

Negligible

Treasury Bills,

Certificate of Deposits,

Commercial Papers,

Call Money

Park funds in currentA/cs or short-term

Bank Dep.

2 days

- 3 weeks

Short-term

Funds

(Floating -

short-term)

Liquidity +

Moderate Income

Little Interest

Rate

Call Money,

CommPapers, Treasury

Bills, CDs, Short-term

Govt. securities.

Those with surplus

short-term funds

3 weeks -

3 months


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Mutual Funds offer several benefits to an investor that are unmatched by the other investment options.

Last six years have been the most turbulent as well as exiting ones for the industry. New players have come

in, while others have decided to close shop by either selling off or merging with others. Product innovation

is now pass with the game shifting to performance delivery in fund management as well as service. Those

directly associated with the fund management industry like distributors, registrars and transfer agents, and

even the regulators have become more mature and responsible.

1. Affordability :

Small investors with low investment fund are unable to invest in high-grade or blue chip stocks. An

investor through Mutual Funds can be benefited from a portfolio including of high priced stock.

2. Diversification :

Investors investment is spread across different securities (stocks, bonds, money market, real estate, fixed

deposits etc.) and different sectors (auto, textile, IT etc.). This kind of a diversification add to the stability of

returns, reduces the risk for example during one period of time equities might underperform but bonds and

money market instruments might do well do well and may protect principal investment as well as help to

meet return objectives.

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3. Variety :

Mutual funds offer a tremendous variety of schemes. This variety is beneficial in two ways: first, it offers

different types of schemes to investors

4. Professional Management:

Mutual Funds employ the services of experienced and skilled professionals and dedicated investment

research team. The whole team analyses the performance and balance sheet of companies and selects them to

achieve the objectives of the scheme.

5. Tax Benefits:

Depending on the scheme of mutual funds, tax shelter is also available. As per the Union Budget-99,

income earned through dividends from mutual funds is 100% tax free. Under ELSS of open-ended equity-

oriented funds an exemption is provided up to Rs. 100,000/- under section 80C.

6. Regulation:

All Mutual Funds are registered with SEBI and they function within the provisions of strict regulations

designed to protect the interests of investors. The operations of Mutual Funds are regularly monitored by

SEBI.

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8. DISADVANTAGES OF MUTUAL FUND:

The following are the disadvantages of investing through mutual fund:

No control over cost:

Since investors do not directly monitor the funds operations, they cannot control the costs effectively.

Regulators therefore usually limit the expenses of mutual funds.

No tailor-made portfolio:

Mutual fund portfolios are created and marketed by AMCs, into which investors invest. They cannot made

tailor made portfolio.

Managing a portfolio of funds:

As the number of funds increase, in order to tailor a portfolio for himself, an investor may be holding

portfolio funds, with the costs of monitoring them and using hem, being incurred by him.

Delay in Redemption:

The redemption of the funds though has liquidity in 24-hours to 3 days takes formal application as well as

needs time for redemption. This becomes cumbersome for the investors.

Non-availability of loans:

Mutual funds are not accepted as security against loan. The investor cannot deposit the mutual funds against

taking any kind of bank loans though they may be his assets.

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9. RISK INVOLVED IN MUTUAL FUND:

THE RISK-RETURN TRADE-OFF

The most important relationship to understand is the risk-return trade-off. Higher the risk greater the

returns/loss and lower the risk lesser the returns/loss. Hence it is up to you, the investor to decide how much

risk you are willing to take. In order to do this you must first be aware of the different types of risks involved

with your investment decision.

MARKET RISK:

Sometimes prices and yields of all securities rise and fall. Broad outside influences affecting the

market in general lead to this. This is true, may it be big corporations or smaller mid-sized companies. This

is known as Market Risk. A Systematic Investment Plan (SIP) that works on the concept of Rupee Cost

Averaging (RCA) might help mitigate this risk.

CREDIT RISK:

The debt servicing ability (may it be interest payments or repayment of principal) of a company

through its cash flows determines the Credit Risk faced by you. This credit risk is measured by independent

rating agencies like CRISIL who rate companies and their paper. An AAA rating is considered the safest

whereas a D rating is considered poor credit quality. A well-diversified portfolio might help mitigate this

risk.

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INFLATION RISK:

Things you hear people talk about: Rs. 100 today is worth more than Rs. 100 tomorrow.

Remember the time when a bus ride costed 50 paisa?

Mehangai Ka Jamana Hai.

The root cause, Inflation. Inflation is the loss of purchasing power over time. A lot of times people

make conservative investment decisions to protect their capital but end up with a sum of money that can buy

less than what the principal could at the time of the investment. This happens when inflation grows faster

than the return on your investment. A well-diversified portfolio with some investment in equities might help

mitigate this risk.

INTEREST RATE RISK:

In a free market economy interest rates are difficult if not impossible to predict. Changes in interestrates affect the prices of bonds as well as equities. If interest rates raise the prices of bonds fall and vice

versa. Equity might be negatively affected as well in a rising interest rate environment. A well-diversified

portfolio might help mitigate this risk.

POLITICAL/GOVERNMENT POLICY RISK:

Changes in government policy and political decision can change the investment environment. They

can create a favourable environment for investment or vice versa. LIQUIDITY RISK:

Liquidity risk arises when it becomes difficult to sell the securities that one has purchased. Liquidity

Risk can be partly mitigated by diversification, staggering of maturities as well as internal risk controls that

lean towards purchase of liquid securities.

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10. NET ASSET VALUE:

Net Asset Value (NAV)

The net asset value of the fund is the cumulative market value of the assets fund net of its liabilities.

In other words, if the fund is dissolved or liquidated, by selling off all the assets in the fund, this is the

amount that the shareholders would collectively own. This gives rise to the concept of net asset value per

unit, which is the value, represented by the ownership of one unit in the fund. It is calculated simply by

dividing the net asset value of the fund by the number of units. However, most people refer loosely to the

NAV per unit as NAV, ignoring the "per unit". We also abide by the same convention.

Definition of NAV

Net Asset Value, or NAV, is the sum total of the market value of all the shares held in the portfolio

including cash, less the liabilities, divided by the total number of units outstanding. Thus, NAV of a mutual

fund unit is nothing but the 'book value.'

Calculation of NAV

The most important part of the calculation is the valuation of the assets owned by the fund. Once it is

calculated, the NAV is simply the net value of assets divided by the number of units outstanding. The

detailed methodology for the calculation of the asset value is given below.

Asset value is equal to

Sum of market value of shares/debentures

+ Liquid assets/cash held, if any

+ Dividends/interest accrued Amount due on unpaid assets Expenses accrued but not paid

NAV per unit = Other liabilities/ No. of units outstanding of the scheme

Details on the above items

For liquid shares/debentures, valuation is done on the basis of the last or closing market price on the

principal exchange where the security is traded.

For illiquid and unlisted and/or thinly traded shares/debentures, the value has to be estimated. The value of

fixed interest bearing securities moves in a direction opposite to interest rate changes Valuation of

debentures and bonds is a big problem since most of them are unlisted and thinly traded. This gives

considerable leeway to the AMCs on valuation and some of the AMCs are believed to take advantage of thisand adopt flexible valuation policies depending on the situation.

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Interest is payable on debentures/bonds on a periodic basis say every 6 months. But, with every

passing day, interest is said to be accrued, at the daily interest rate, which is calculated by dividing the

periodic interest payment with the number of days in each Period. Thus, accrued interest on a particular day

is equal to the daily interest rate multiplied by the number of days since the last interest payment date.

Usually, dividends are proposed at the time of the Annual General meeting and become due on the

record date. There is a gap between the dates on which it becomes due and the actual payment date. In the

intermediate period, it is deemed to be "accrued".

Expenses including management fees, custody charges etc. are calculated on a daily basis.

NAV and its impact on the returns

We feel that a MF with lower NAV will give better returns. This again is due to the wrong perception

about NAV. An example will make it clear that returns are independent of the NAV.

Say, you have Rs 10,000 to invest. You have two options, wherein the funds are same as far as the

portfolio is concerned. But say one Fund X has an NAV of Rs 10 and another Fund Y has NAV of Rs 50.

You will get 1000 units of Fund X or 200 units of Fund Y.

After one year, both funds would have grown equally as their portfolio is same, say by 25%. Then

NAV after one year would be Rs 12.50 for Fund X and Rs 62.50 for Fund Y. The value of your investment

would be 1000*12.50 = Rs 12,500 for Fund X and 200*62.5 = Rs 12,500 for Fund Y. Thus your returns

would be same irrespective of the NAV.

It is quality of fund, which would make a difference to your returns. In fact for equity shares also

broadly this logic would apply.

Misconception about NAV

This situation arises from the perception that a fund at Rs 10 is cheaper than say Rs 15 or Rs 100.

However, this perception is totally wrong and investors would be much better off once they appreciate this

fact.

Two funds with same portfolio are same, no matter what their NAV is. NAV is immaterial. Why

people carry this perception is because they assume that the NAV of a MF is similar to the market price of

an equity share. This, however, is not true.

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11. BASIC CONCEPTS OF LOADS:

1. Entry Load:

The load charged at the time of investment is known as entry load. Its meant to cover the cost that the

AMC spends in the process of acquiring subscribers commission payable to brokers, advertisements,

register expenses etc. The load is recovered by way of charging a sale price higher than the prevailing NAV.

2. Exist Load:

Some AMC do not charge an entry load but they charged an exist load i.e., they deduct a load before paying

out the redemption proceeds. Psychologically, investors are much more willing to pay exist loads as

compared to entry loads.

3. Unit:

Units mean the investment of the unit holders in a scheme. Each unit represents one undivided share in the

assets of a scheme. The value of each unit changes, depending on the performance of the fund.

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12. FACTORS AFFECTING MUTUAL FUND:

1. Governmental Influences

Mutual fund business is a highly regulated business throughout the world as it seeks to ensure that

quality and fairly priced schemes are available. Governmental intervention thus in mutual fund market

usually is most needed to ensure that insurers are reliable. And in the developing countries the additional

goal may be promotion of domestic mutual fund industry and ensuring the national mutual fund industry

contributes to overall economic development. In a non technical sense mutual fund is purchased in a good

faith so the duty of government intervention in mutual fund industry is to ensure that this principle of mutual

fund is never defeated.

The ideology of government plays an important role in mutual fund industry also. For example in the past

during 1991, the P .V Narsimha Rao government strongly believed in liberalization also liberalized the

mutual fund sector which helped to allow private players in the industry from 1993 and enhancing joint

ventures with foreign companies.

The present government with more focuses on foreign direct investments has declared to favor the rise FDI

in mutual fund to 49% which further enhances competition in the industry.

2. Taxation Policy

Social equity being one of the motives behind tax collections, government gives certain exemptions from

such levying. One such exemption is deduction incurred by taxpayers towards investment in mutual fund

coverage. Similarly, capital invested in infrastructure bonds etc is offered with certain concession under tax

laws. The central idea behind such exemptions is that the capitals so allocated by individuals reduce the

ultimate burden on the public infrastructure or helps in creating such infrastructural facilities.

The income tax rules related to the mutual fund transactions can be classified under:

A. Exemptions available to companies

Expenses deductible from commission earned by distributor, banker, national distributor.

Tax concessions under risk management practices of an enterprise

In growth option equity schemes there no long term capital gain by company.

In dividend option equity schemes there no tax.

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Return received by charitable trust is total exempted from tax.

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B. Tax rules governing investment by individuals

Deduction in respect of ELSS schemes (sec 80C): Investment in this fund would enable you to avail

the benefits under clause (xiii) of a section 80C of the Income Tax Act investment made in the schemes up

to 1 lakh by the eligible investor for deduction under this section of the Act.

Since it will be an income deduction an investment of Rs 1 lakh in this fund can save off Rs. 33600

from your tax payable liability (assuming you are in the highest tax bracket).

Investor will receive tax free dividend in above case.

Investor will also receive tax free dividend by investing equity schemes in dividend option Investors also

receive tax free return by investing equity schemes in growth option for long term capital gain.

Tax plannings

An individual can think of health ELSS schemes purchase as a tool of tax planning exercise. For

example people who are marginally affected by tax liability can be as well purchase an ELSS fund get

benefits of Rs. 33600 from tax. In this way tax burden is become less by purchasing ELSS fund. Thus tax

law offer benefit to individuals/companies by way of exemptions/deductions of expenditure incurred

towards purchase of mutual fund various schemes coverage from total taxable income.

3. Foreign Trade Regulations

With the vast potential for mutual fund in India due its large population in the country many foreign

companies are ready to enter into the Indian market. But companies can be permitted in India through joint

ventures with an Indian partner as well as come separately and the foreign equity shall be restricted to only

25%. Another statement also tells that Indian subsidiaries of foreign companies shall not be allowed to

participate in banking sector unless they entered in to joint ventures with the Indian partners.

But at present the mutual fund regulator is in favor of hike in FDI cap from 25% to 49%, and is finalizing a

report that will be submitted to the government for a comprehensive legislation for the industry. The security

exchange board of India and association of mutual fund India have been advocating a hike in FDI limit for

mutual fund companies so that the foreign partners can infuse additional funds in these companies to sustain

their growth.

The government will need to amend the separate mutual fund Act for FDI capital as well as domestic

company as this is the statutory provision unlike sectors like civil aviation and telecom, which have come

through notification.

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4. National Income

The relative importance of the mutual fund Market within a country will also be dependent upon

economic development. With greater rates of economic growth, consumption of investment should increase

as a result of increased income, and an increased stock of assets requiring mutual fund. Furthermore, the

development of mutual fund is likely to facilitate greater economic growth, implying that economic growth

may be endogenous. Consistent with these arguments, studies find that the level of financial development

and economic development are positively related to the level of mutual fund across emerging markets.

5. Consumptions and Savings

The gross capital formation of any country is important for indication of its growth in the future

years. It is quite necessary to set up the rate of capital formation so that a large stock of machines, tools and

equipments are accumulated in a country. Experience of development in other countries suggests that a high

rate of capital formation was achieved to trigger rapid rate of economic growth. With the hike in foreigncapital coming to India the rate of capital formation is becoming boom to insurers, which has given them

opportunities. It is heartening to them to note that latest savings rate of 28% is highest till now and with the

growth rate near to 8% is bringing a pool of buyers purchasing power. This directly influences the demand

for mutual fund products.

6. Employment

The effect of employment on mutual fund industry is as direct as that on economic development of

any country. With the rising levels of employment the effect on mutual fund industry is positive because

employment adds to the insured properties and assets from every prospective be it due to organized or

unorganized.

7. Inflation

The midterm policy review the strong macroeconomic indicators and RBI has revised its GDP

growth estimates to the upper limit of the earlier projection range 8% inflation (WPI) has been steadily

moving up in recent times and RBI has highlighted that primary articles prices have been one of the key

contributors. However one needs to keep in mind that recent increase in global oil prices.

8. Money supply

The central banks has indicated that credit growth and money supply number are likely to be above

its prosecution for the current fiscal year, the statement to consider promptly all possible measures as

appropriate to the evolving global and domestics situation is indicative of phased increase in FII limits for

gilt investment could help in depending the securities market and is part of the road map towards fuller

convertibility.

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9. Interest

Interest is major factor for investment when a person find less return from investment tool than people move

towards the higher returns tool of investment.\

10. Risk factor

All investments in Mutual Fund and securities are subject to market risks and the NAV of the fund may go

up or down depending on the factors and forces affecting the security market. There can be no assurance that

the funds objective will be achieved. Past performance of the sponsors/Mutual fund/schemes/AMC is not

necessarily indicative of the future results. The name of the schemes does not in any manner indicate their

quality, their future prospects or returns.

The specific risk would be credit, market, illiquidity, judgmental error, interest rate, swaps and forward rates.

11. Demographic environment

The demographic environment significantly affects the demand for the mutual fund industry. Factors like the

average age of the population, levels of education, household structures income distribution, life style and

the extent of industrialization as well as urbanization terribly influences the demand of mutual fund schemes.

In India the average age of the population is at an increasing trend following the improved medical

technology and better awareness of health care requirements. As a result, the risk of investment death is

decreasing while connectivity is increasing. Simultaneously the demand for pension funds and income fund

is expected to grow.

For example at the time of independence the average age of dying for Indians was 45. Presently it has

increased to 65 following better healthcare, improvements in medical science and more health consciousness

among the common man. By 2010 it is expected to rise to 75. Hence risk profile is also changing. Earlier

people are thinking about safely but at present people thinking about capital growth.

12. Social Factors

The social environment covers the customs, habits, level of education, tastes and standard of living of people

in the society. Todays social environment is greatly influenced to a major extent by the changes in

technological aspects. With the rapid progress in technology and economic liberalization, the physical

boundaries are gradually vanishing. As a result, the social life of the people and their views towards risk and

uncertainty of life and health are gradually changing.

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13. MUTUAL FUND PLAYERS:

The Indian mutual fund industry is mainly divided into three kinds of categories. These categories include

public sector players, nationalized banks and private sector and foreign players.

UTI Mutual Fund was one of the leading Mutual Fund companies in India till May 2006 with a corpus of

more than Rs.31, 000 Crore and it is the public sector mutual fund.Bank of Baroda, PuJ.M.Financial

servicesab National Bank, Can Bank and SBI are the major nationalized banks mutual fund.

At present mutual fund industry is mainly dominated by private and foreign sector players which include

major players like Prudential ICICI Mutual Fund, HDFC Mutual Fund, Reliance Mutual Fund etc. are

private sector mutual funds players while Franklin Templeton etc. are major foreign mutual fund players. At

present there are more than 33 players operating in Indian. The brief introduction of major players is given

as follows.

ABN AMRO Mutual Fund

ABN AMRO Mutual Fund was setup on April 15, 2004 with ABN AMRO Trustee (India) Pvt. Ltd. as the

Trustee Company. The AMC, ABN AMRO Asset Management (India) Ltd. was incorporated on November

4, 2003. Deutsche Bank A G is the custodian of ABN AMRO Mutual Fund.

Birla Sun Life Mutual Fund

Birla Sun Life Mutual Fund is the joint venture of Aditya Birla Group and Sun Life Financial. Sun Life

Financial is a global organization evolved in 1871 and is being represented in Canada, the US, the

Philippines, Japan, Indonesia and Bermuda apart from India. Birla Sun Life Mutual Fund follows a

conservative long-term approach to investment. Recently it crossed AUM of Rs. 10,000 Crore.

Bank of Baroda Mutual Fund

Bank of Baroda Mutual Fund or BOB Mutual Fund was setup on October 30, 1992 under the sponsorship of

Bank of Baroda. BOB Asset Management Company Limited is the AMC of BOB Mutual Fund and was

incorporated on November 5, 1992. Deutsche Bank AG is the custodian.

HDFC Mutual Fund

HDFC Mutual Fund was setup on June 30, 2000 with two sponsors namely Housing Development Finance

Corporation Limited and Standard Life Investments Limited.

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HSBC Mutual Fund

HSBC Mutual Fund was setup on May 27, 2002 with HSBC Securities and Capital Markets (India) Private

Limited as the sponsor. Board of Trustees, HSBC Mutual Fund acts as the Trustee Company of HSBC

Mutual Fund.

ING Vysya Mutual Fund

ING Vysya Mutual Fund was setup on February 11, 1999 with the same named Trustee Company. It is a

joint venture of Vysya and ING. The AMC, ING Investment Management (India) Pvt. Ltd. was incorporated

on April 6, 1998.

Prudential ICICI Mutual Fund

The mutual fund of ICICI is a joint venture with Prudential PLC of America; one of the largest life insurancecompanies in the US of A. Prudential ICICI Mutual Fund was setup on 13th of October 1993 with two

sponsors, Prudential PLC. and ICICI Ltd. The Trustee Company formed is Prudential ICICI Trust Ltd. and

the AMC is Prudential ICICI Asset Management Company Limited incorporated on 22nd of June 1993.

Sahara Mutual Fund

Sahara Mutual Fund was set up on July 18, 1996 with Sahara India Financial Corporation Ltd. as the

sponsor. Sahara Asset Management Company Private Limited incorporated on August 31, 1995 works as the

AMC of Sahara Mutual Fund. The paid-up capital of the AMC stands at Rs 25.8 crore.

State Bank of India Mutual Fund

State Bank of India Mutual Fund is the first Bank sponsored Mutual Fund to launch offshore fund, the India

Magnum Fund with a corpus of Rs. 225 cr. approximately. Today it is the largest Bank sponsored Mutual

Fund in India. They have already launched 35 Schemes out of which 15 have already yielded handsome

returns to investors. State Bank of India Mutual Fund has more than Rs. 5,500 Crore as AUM. Now it has an

investor base of over 8 Lakhs spread over 18 schemes.

Tata Mutual Fund

Tata Mutual Fund (TMF) is a Trust under the Indian Trust Act, 1882. The sponsor for Tata Mutual Fund is

Tata Sons Ltd., and Tata Investment Corporation Ltd. The investment manager is Tata Asset Management

Limited and its Tata Trustee Company Pvt. Limited. Tata Asset Management Limited's is one of the fastest

in the country with more than Rs. 7,703 Crore (as on April 30, 2005) of AUM.

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Kotak Mahindra Mutual Fund

Kotak Mahindra Asset Management Company (KMAMC) is a subsidiary of KMBL. It is presently having

more than 1,99,818 investors in its various schemes. KMAMC started its operations in December 1998.

Kotak Mahindra Mutual Fund offers schemes catering to investors with varying risk - return profiles. It was

the first company to launch dedicated gilt scheme investing only in government securities.

Reliance Mutual Fund

Reliance Mutual Fund (RMF) was established as trust under Indian Trusts Act, 1882. The sponsor of RMF is

Reliance Capital Limited and Reliance Capital Trustee Co. Limited is the Trustee. It was registered on June

30, 1995 as Reliance Capital Mutual Fund, which was changed on March 11, 2004. Reliance Mutual Fund

was formed for launching of various schemes under which units are issued to the Public with a view to

contribute to the capital market and to provide investors the opportunities to make investments in diversifiedsecurities.

Standard Chartered Mutual Fund

Standard Chartered Mutual Fund was set up on March 13, 2000 sponsored by Standard Chartered Bank. The

Trustee is Standard Chartered Trustee Company Pvt. Ltd. Standard Chartered Asset Management Company

Pvt. Ltd. is the AMC which was incorporated with SEBI on December 20,1999.

Franklin Templeton India Mutual Fund

The group, Franklin Templeton Investments is a California (USA) based company with a global AUM of

US$ 409.2 bn. (as of April 30, 2005). It is one of the largest financial services groups in the world. Investors

can buy or sell the Mutual Fund through their financial advisor or through mail or through their website.

They have Open end Diversified Equity schemes, Open end Sector Equity schemes, Open end Hybrid

schemes, Open end Tax Saving schemes, Open end Income and Liquid schemes, Closed end Income

schemes and Open end Fund of Funds schemes to offer.

Morgan Stanley Mutual Fund India

Morgan Stanley is a worldwide financial services company and its leading in the market in securities,

investment management and credit services. Morgan Stanley Investment Management (MISM) was

established in the year 1975. It provides customized asset management services and products to

governments, corporations, pension funds and non-profit organizations. Its services are also extended to high

net worth individuals and retail investors. This is the first close end diversified equity scheme serving the

needs of Indian retail investors focusing on a long-term capital appreciation.

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Escorts Mutual Fund

Escorts Mutual Fund was setup on April 15, 1996 with Escorts Finance Limited as its sponsor. The Trustee

Company is Escorts Investment Trust Limited. Its AMC was incorporated on December 1, 1995 with the

name Escorts Asset Management Limited.

Benchmark Mutual Fund

Benchmark Mutual Fund was setup on June 12, 2001 with Niche Financial Services Pvt. Ltd. as the sponsor

and Benchmark Trustee Company Pvt. Ltd. as the Trustee Company. Incorporated on October 16, 2000 and

headquartered in Mumbai, Benchmark Asset Management Company Pvt. Ltd. is the AMC.

Chola Mutual Fund

Chola Mutual Fund under the sponsorship of Cholamandalam Investment & Finance Company Ltd. wassetup on January 3, 1997. Cholamandalam Trustee Co. Ltd. is the Trustee Company and AMC is

Cholamandalam AMC Limited.

LIC Mutual Fund

Life Insurance Corporation of India set up LIC Mutual Fund on 19th June 1989. It contributed Rs. 2 Crore

towards the corpus of the Fund. LIC Mutual Fund was constituted as a Trust in accordance with the

provisions of the Indian Trust Act, 1882. . The Company started its business on 29th April 1994. The

Trustees of LIC Mutual Fund have appointed Jeevan Bima Sahayog Asset Management Company Ltd as the

Investment Managers for LIC Mutual Fund.

GIC Mutual Fund

GIC Mutual Fund, sponsored by General Insurance Corporation of India (GIC), a Government of India

undertaking and the four Public Sector General Insurance Companies, viz. National Insurance Co. Ltd

(NIC), The New India Assurance Co. Ltd. (NIA), The Oriental Insurance Co. Ltd (OIC) and United India

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PART II PROJECT STUDY

Research Methodology:

Research Problem

To know the investment behavior of different investors in Baroda city.

Research Objective

The main objective of the project is to study the risk taking ability and investment pattern of the investor.

Subsidiary Objective

1. To know in which proportion does investors invest in different financial instruments.

2. To know the priority level between different factors related to investment like safety, return and risk.

3. To study growth of different financial instruments.

4. To know the main parameters to measure risk and return, so we may raise best performing portfolio.